Bear Stearns analyst Bob Peck doesn’t quite stick his neck out and say that mid-$30s is the right price for Microsoft to pay for Yahoo, but he does suggest that the original bid is way too low:
Yahoo! was at a 52-week low when Microsoft announced its intentions, having recently touched $34 in October… The 2008 $1.85 billion EBITDA guidance midpoint is predicated on an investment year. We believe that investors must therefore normalize the multiple to get a true feeling of what Microsoft is paying. At $2.1-$2.2 billion of EBITDA, Microsoft’s multiple would only be paying 15x for one of the leading Internet properties and online advertising player.
We’re glad to see someone invoke valuation when making this argument. (Yahoo didn’t, when it declared that Microsoft’s bid “significantly undervalued” the company).
As Yahoo shareholders, we, too, would like to see at least a mid-$30s deal, but we can’t argue that Microsoft is stealing Yahoo. Yahoo’s value has nothing to do with 2008 and everything to do with the company’s trajectory thereafter–and the jury’s still out on that. (For perspective, RBC’s Jordan Rohan puts Yahoo’s current value at about $24, and he uses 2009 numbers, not 2008’s “depressed” EBITDA).
The other problem with most Yahoo valuation arguments: Most analysts attribute significant and precise values to Yahoo’s off-balance assets (stake in Alibaba, etc.) when calculating the company’s enterprise value. We’re happy to do that with cash, but we have a problem doing it with stakes in other companies. They’re worth something, certainly, but the idea that one can precisely value them, assume perfect liquidity, and ignore the tax hit involved in actually selling them seems a stretch.
Bottom line: If you think 2008 is just an aberration for Yahoo and that, in 2009 and beyond, it’s off to the races again–then Bob’s right: Microsoft is stealing the company. If, however, you believe that Yahoo has lost its way and that 2008 is just a continuation of several years of disappointment, then you should be thrilled with $31. ($28.70, rather).
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